Ticking Time Bombs: 3 E-Commerce Stocks to Dump Before the Damage Is Done

Stocks to sell

Inflation has been a recurring theme of the economy, but it’s gotten extra hot in recent years. Reckless money printing is the primary catalyst for higher prices and higher interest rates, and the return of student loan payments doesn’t make matters any better. This is wreaking havoc on e-commerce stocks and making several of them a liability for your portfolio.

These trends can put many businesses at risk, including e-commerce giants. During economic contraction and weakening consumer spending, many people trim their discretionary spending.

Some industries are better insulated against reduced consumer spending. However, corporations that rely on discretionary spending to fuel their profits can be in for rude awakenings. Reduced consumer spending will affect e-commerce companies that generate the bulk of their earnings from non-essential items.

The economic situation has turned several e-commerce stocks into ticking time bombs. Even for investors who believe in the sector, it’s important to assess the risks of these three investments.

E-Commerce Stocks to Drop: Etsy (ETSY)

Source: Sergei Elagin / Shutterstock

Etsy (NASDAQ:ETSY) has fallen from grace after the company couldn’t maintain pandemic-fueled growth rates. The company has even been unable to maintain revenue and earnings growth rates it comfortably held before oppressive lockdowns took form.

The company has been reporting declining gross merchandise sales for several quarters and has been relying on higher fees to generate more revenue. Those higher fees have weakened the business model, and the continued decline of gross merchandise sales can expose fundamental weaknesses.

Bullish investors note the company’s 16 forward P/E ratio, but worsening earnings make that forward metric less reliable. Some bulls also highlight cost-cutting and rising consumer spending as two potential catalysts for the stock.

However, operating expenses grew much faster than revenue in the previous quarter. Revenue grew by 7.5% year-over-year while operating expenses grew by 29.7% year-over-year. The cost of revenue grew by 10% year-over-year, still outpacing revenue growth.

Investors will find that Etsy reported $61.9 million in net income which represents a 15.3% year-over-year decline. However, Etsy’s financial situation is much worse. The figure includes a $56.5 billion benefit for income taxes.

The company’s income before factoring in the income tax benefit only comes to $5.4 billion. This number falls well below the $73.2 billion from a year earlier. Investors have many reasons to be worried about Etsy’s long-term potential.

Target (TGT)

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Target (NYSE:TGT) is another e-commerce stock poised for a troubling future. The company has exposure to retail challenges, such as changing consumer behavior and more thefts. These are some of the factors that resulted in Target lowering its full-year sales and profit expectations.

Shares have certainly played a part and are down by 25% year-to-date. Although shares have gained 27% throughout the past five years, long-term investors know what they once had. TGT is down by more than 50% from the all-time high it set in 2021.

A Target executive mentioned the strong reaction to Pride merchandise as one of the reasons for the stock’s sales slump. Culture wars have their role, but the underlying problems go much deeper.

Target makes a good chunk of revenue from discretionary spending, and consumers have been cutting back. Target’s e-commerce sales dropped by 10.5% year-over-year as consumers sought other options and got more protective of their spending. Store sales didn’t experience as much of a drop, but rising gas prices give people another reason to minimize their visits to Target stores. This easily earns its spot on our list of e-commerce stocks to drop.

Shopify (SHOP)

Source: Burdun Iliya / Shutterstock.com

Shopify (NYSE:SHOP) is a tremendous e-commerce growth company that has more than tripled throughout the past five years. Shares are also up by 48% year-to-date.

Shopify serves many small businesses and corporations, and its monthly subscription model is enticing. Net losses are high, but the company has solid revenue growth. In the past quarter, Shopify reported 31% year-over-year revenue growth. The company was also cash flow positive for the third consecutive quarter.

The company also reported a $1.6 billion operating loss, but $1.7 billion of those losses come from one-time items like accelerated stock-based compensation from the logistics business sale. Without these one-time expenses, Shopify manages to report another quarter of profitability.

Shopify still has the elements of a long-term stock winner, but the company’s 77 forward P/E ratio makes it a bit vulnerable in the current market. Valuation remains a concern, especially if Shopify reports decelerating revenue growth in 2024. Shopify has always been a volatile stock and currently features a 2.04 beta.

Beta measures a stock’s volatility against the overall market, with 1.0 being the average. Shopify’s high beta implies sharper price movements than the broader market. Those sharp price movements can become troublesome for short-term investors. However, long-term investors with multi-year horizons seem poised to benefit from the stock.

I have a covered call on my Shopify shares. I remain bullish on the stock in the long-term but am bearish throughout the short term, especially as the economy shows signs of weakening. Investors who can commit to a roller coaster stock may benefit from holding onto shares, but it isn’t for everyone. Do your best to avoid these three e-commerce stocks.

On this date of publication, Marc Guberti held a long position in SHOP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Marc Guberti is a finance freelance writer at InvestorPlace.com who hosts the Breakthrough Success Podcast. He has contributed to several publications, including the U.S. News & World Report, Benzinga, and Joy Wallet.

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